Wednesday, February 8, 2017

Carbon compromise?

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.

So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.

Environmental groups that really care about carbon are starting to realize that the current system produces symbolism at great cost but will never produce the kind of carbon reductions they think are necessary. High speed trains and electric coal-powered cars may make you feel good, but they don't make a dent in carbon. They are also realizing that climate is swallowing up the world's attention for other pressing environmental problems. Endangered species need habitat, now, not 2 degrees cooler in a century. People are dying of dirty water and particulate pollution now. Yes, they'd prefer carbon tax and controls, since they don't trust the tax incentive alone. But given the choice, I've met serious environmentalists who would take the deal.

Alas, the sad fate of the Washington (state) carbon tax is not encouraging. Maximalism won. Some large environmental organizations are going to have to realize, in the current era, this is their best deal. Perhaps staring in the face that waiting for a progressive uprising that takes back house, senate, presidency, state legislators, governors, and turns back to tide of global nationalist populism, allowing regulations of the scale that actually would cut back carbon --without using nuclear power -- will induce a little deal-making will. It also feels good to be part of the "resistance," but the climate keeps warming while you feel good.

Those on the other side, horrified at the waste, cronyism, and economic damage of our current controls would prefer nothing, and hence keep arguing about the science. But a straightforward carbon tax would be immensely less distorting than what they will get otherwise. This one will not go away. Removing energy regulation, even with Rick Perry in charge of DOE, will be a miserable mess against an entrenched and very politically effective opposition. If you can get them to accept the deal, it will go much more easily than trying to shove no carbon regulation down their throats.

Of course, the major problem in any deal is trust. The environmental side may not trust that carbon taxes will be high enough to abandon command and control. And the market side certainly does not trust that controls will be removed, or not reimposed -- especially given the large amount of money that green subsidy-seekers can get from them.

Minor quibbles: The oped and council report refer to steadily increasing carbon taxes. Ideally, in my view, a big advantage of the carbon tax is that it is easily adjustable -- much more adjustable than direct controls. Implement a carbon tax at say $40 a ton. Keep fighting about the science, and the level of the carbon tax. There is uncertainty about the science, face it. Once in place it's easier to raise if we learn carbon is a bigger problem than thought, and vice versa.

Also, I think it will be much easier to agree on the principle of a carbon tax if each side knows it can keep fighting about the rate than if they have to agree on the principal of carbon tax + deregulation and the rate, and the schedule of future rates. (Generally, I think things would go much better to debate the structure of the tax code separately from the rates.)

Not mentioned, of course, is that it is vital for a tax like this that the law forbid any of the special credits and deductions that people will instantly start asking for. "Family farmers can't pay the carbon tax on their diesel fuel....; low income americans need a break so they can drive to work...." The incentive to make every single tax redistributive is strong.

Second, what to do with the money? Greg Mankiw has, on other occasions, argued that the carbon tax revenue should offset other, more distorting taxes. It is a double-whammy -- most taxes, in order to raise revenue, reduce some desirable economic activity. A carbon tax, to raise revenue, reduces an undesirable economic activity. As a matter of economics, Greg is exactly right.

The Oped and council propose instead that the tax is rebated to Americans, so the tax is revenue-neutral. That is, I think, politically attractive. A $2,000 check to each taxpayer is a nice way to build a political consensus for keeping the carbon tax, much as using the tariff to fund civil war pensions kept a strong pro-tariff constituency in the late 1800s. In a previous post, I suggested carbon rights instead: Each American owns the rights to emit X tons of carbon, which he or she sells on an electronic marketplace. Or throws away, if they want to do their bit. That too gives people a stake in keeping the system going.

But we should be clear when as economists we are treading into political waters. Giving up on a optimal tax in order to produce political support for a project is the kind of tradeoff that we're not as good at as we are at figuring out optimal taxes in the first place, and figuring out compromises between current political groupings is really not our strong point. Perhaps it would be better to outline the possibilities -- rebate if you think it's politically necessary, use to eliminate other distorting taxes if you can -- and let politicians figure that one out.

Quibbles over.

I must add that Shultz is an inspiration. I hope that at 96 I can write opeds half this good. Heck, I wish I could do it now!

50 comments:

I usually enjoy your postings a lot, but you kind of lost me this time when the obvious solution (stop regulating carbon) is just pushed aside for a "more efficient" big government effort to ... regulate carbon.

I also assume that most economists still believe that you "can't tax a corporation, only the consumers of their products." Having to "buy credits" to produce goods only increases the cost of goods bought buy consumers, no? This is akin to a tax when goods are priced for sale....

But then there is a complex Alaska endowment type scheme to have a pre-bate to pay people back for the tax?

I think we would yearn for the old system very shortly.

Less is more, more and more often.

-XC

PS - Neither of the authors wrote that op-ed. At best they "supervised" a team writing it.

When I was young I dabbled in physics and computational models. It is a mystery to me why there is any "uncertainty" about man made global warming. I would have thought that the rational response to the uncertainty would have been to spend, say, ten billion dollars and get a definitive answer. But apparently that's just me.

One of the problems you have with a "tax" is that the Republicans have an abhorrence for the word. It might be easier to continuously auction off tradeable carbon permits, each for a fixed number of tons within, say, the following six months. Then you can adjust minimum and maximum prices and the target volume as time goes by.

The existence of global warming is not uncertain, but the net costs associated with it are. Waiting reduces uncertainty about the net costs, allowing us to get a better picture which mitigation/adaptation measures are worth taking in the future. The rational thing to do is to wait until the benefit of waiting one more year just compensates the cost.I remember a piece by William Nordhaus saying that the cumulative net cost of waiting 50 years instead of acting now would be about $4 trillion - which sounds like a large number, but is tiny compared to World GNP over the period. Waiting less than 50y may well have net benefits.

The problem with tradeable permits is that often they are gifted to companies or emitters to "grandfather them in." A carbon tax is a windfall to the govt (and therefore the taxpayer), tradeable permits are often a windfall to incumbent "polluters". In government terms the first is probably preferable, but there is obviously a constituency for the second (someone gets rich from it)

The economics of climate adaptation should center on how cities will be affected. Cities compete for the skilled. Those cities that do not compete well will suffer a brain drain and declining land prices. This provides a strong incentive to rebuild our durable capital stock in a "smarter" more resilient way.

My 2010 Climatopolis book fleshes out this point.http://voxeu.org/article/climatopolis-how-will-climate-change-impact-urbanites-and-their-cities

Yes, urbanites eat food but the world is a big place and storage and futures markets and spatial diversification protect us from climate shocks to food production declines at any one location. The macro literature on the costs of climate change (See Nordhaus and Weitzman) have ignored the huge number of spatial adaptation strategies (think of Wall Street moving to higher ground in Connecticut) that will help us to adapt. Julian Simon will receive more citations than Paul Ehrlich in this ongoing debate.

John, You made a big non sequitur in writing this:"The real debate is how much damage does climate change actually do -- does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us (above nuclear war, pandemic, state failure, and so on)? And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective?”Until you establish how much damage it does, or whether it even does damage, you can’t go to a policy that assumes that the damage is great. I’ve seen George speak about this a few times, but I’ve never seen him make the case why the damage is great.

David - there are scientists who say it will cause a lot of damage. It therefor seems clear to me that risk avoidance suggests that resources should be dedicated to determining size of the damage threat.

Some of the risks seem clear. Climate change seems to be contributing to instability in Somalia and Syria and probably other places. A tidal wave of environmental refugees into Europe would be a problem for the whole western world.

Half of Florida and half of Louisiana disappearing under the waves would be just an American problem. Half of Bangladesh disappearing would be a world problem.

And these sorts of political, economic effects are orders of magnitude less certain than temperature -- exactly my point. The middle east seems to be doing a fine job of blowing up all on its own, thank you. Trying to bring political stability to the middle east by lowering temperature 1 degree in a hundred years is like trying to bring rain to california by building a high speed rail line, or trying to bring luck at the lottery by praying to st. Jude. It's magical thinking about causes and effects.

I tend to believe the scientists when they say there is going to be a problem. For me, subjectively, winters are getting warmer, and it is having environmental impacts where I live.

If someone says that a drought in Syria was contributed to by climate change and in turn contributed to conflict it is not immediately obvious to me that those links are too remote or mere "magical thinking". https://www.nytimes.com/2015/03/03/science/earth/study-links-syria-conflict-to-drought-caused-by-climate-change.html A drought in California or the Mid-West would have real economic consequences for the United States.

I hope that climate change is not real. If it is real then I hope it is man made because if it is man made then we have some hope of controlling it. If on the other hand we are in a trend where the output from the Sun is going to increase by 0.1% per year for a thousand years then mankind is doomed.

Under the circumstances it seems to me that the prudent thing to do is to pour research money into determining as soon as possible what is going on and what the effects will be.

The correct response to uncertainty is not to say "it is uncertain and therefor is not happening". That's like not going to the Doctor to find out why an interesting new mole is growing on your face.

Any fans of Randall Monroe here? He presents real information is a manner that is simultaneously amusing and compelling. e.g. https://xkcd.com/1732/ and https://xkcd.com/1379/We hear so much about warming principally because the denialists have constructed so great a body of alternative facts countering the notion.Rarely mentioned is ocean acidification. Much of the CO2 emitted when burning fossil fuels ends up dissolved in the oceans. The CO2 make the water more acidic --- greater concentration of H+ ions. Change breeds change. Coral bleaching is one consequence that is being noticed. There is a significant risk that consequent (to acidification) collapse of the food web that supports the sea food industry is in our near future.Rarely mentioned is the fact that we are burning up fossil fuels approximately a million times faster than they were accumulated. Anybody want to suggest that it is sane to base an economy on doing that?There are many reasons to be making a speedy transition to "renewable" energy sources. Not least of which is that the cost of building renewable power sources is now comparable to the cost of building fossil fueled plant. This is not lost on the bosses of China. They are busily building wind turbines and photovoltaics. Along with the business infrastructure to do so. If we don't get a move on their industry will bury ours. A carbon tax is just the ticket for encouraging our business leaders to make this transformation.--E5

Honestly, I don't see how conservatives could argue, in good faith, against a revenue-neutral carbon tax. You don't even have to make the case for global warming or how bad it is - it doesn't matter, since it's not growing the size of the government (no additional revenue, will have to relinquish power in certain places to tax carbon), and that's the real worry of the conservatives. If global warming is a hoax in this scenario, so what? I'm still on board with it.

Conversely, I don't see how progressives can honestly argue against it either. If climate change is actually a threat to civilization, would they not be OK with not-growing-nor-shrinking the government in exchange for saving civilization as we know it?

Tax policy always changes relative prices, no? Granted that it's more of a distortion to raise a price and lower a price than to simply raise a price... But if it's politically infeasible to do the second, we can handle the damage from the first. We're still standing after the ACA, after all, and that was not a small distortion.

A *revenue neutral* carbon tax should not be political suicide. We raise taxes "for the children" all the time.

"Until you establish how much damage it does, or whether it even does damage, you can’t go to a policy that assumes that the damage is great."

https://www.cdc.gov/mmwr/preview/mmwrhtml/mm6303a6.htm

Unintentional carbon monoxide poisoning kills about 430 people in the U. S. per year. It is another gas that is giving off by burning hydrocarbons (coal, oil, gasoline, natural gas, etc.).

https://en.wikipedia.org/wiki/Greenhouse_gas

1. Carbon Monoxide (CO) is the proximate cause for numerous deaths in the U. S.

2. Carbon Monoxide (CO) is a carbon based molecule that oxidizes in the atmosphere to produce carbon dioxide (CO2)

3. Carbon Monoxide is not a greenhouse gas and so one way to get around CO2 emission requirements is to generate more CO (incomplete combustion) and less CO2.

Obviously carbon monoxide has it's own set of emission requirements but introducing a greenhouse gas tax may do more harm than good by pushing the cost of carbon dioxide emissions to a point where it's cheaper to give off carbon monoxide and pay the fines.

Building a power plant that emits CO instead of CO2 would cost a huge amount more than building a photovoltaic installation that produces the same amount of average power. Therefore no earthly reason for sane businessmen to do so.Sane businessmen in the Hawiian Electric Company have already recognised that their future lies in PV panels and electric cars. The electric (re)distribution infrastructure will be arranged to collect power from the widely dispersed panels and deliver it to cars where they are parked in the day time.As my son puts it ..."The ship has already sailed. Trump can bellow all he likes about new coal burning but the transition to renewables is happening."There is much adaptation to be done. I think a carbon tax will be a huge assistance to make it happen promptly.--E5

Frank, I'm a little confused. I thought my comment clearly championed a free market solution by trading carbon rights on a listed exchange. Not a tax that is subject to cronyism. BTW. I traded carbon futures contracts on the Chicago Climate Exchange before it closed in 2010. That exchange died a quiet death because of little interest. Classic externality case. Cost or benefit affecting those who did not choose to incur those costs or benefits.

Wrong David. I was replying to David Henderson's post about establishing how much damage CO2 does.

Anonymous E5,

"Building a power plant that emits CO instead of CO2 would cost a huge amount more than building a photovoltaic installation that produces the same amount of average power."

Not really. Carbon monoxide is emitted by the incomplete combustion of coal and other fossil fuels (not enough oxygen relative to the amount of fuel being burned). It's simple enough to adjust the fuel / air mixture to produce more carbon monoxide and less carbon dioxide.

"There is much adaptation to be done. I think a carbon tax will be a huge assistance to make it happen promptly."

First, I don't believe that tax policy should be used in this way (changing relative prices). And any tax policy that, for instance, benefits oil producers over coal producers at the federal level can be undone at the state level.

Second, it's called global warming for a reason.

The question is, is a carbon tax intended to limit greenhouse gas emissions?

Several greenhouse gases (Water Vapor, Nitrous Oxide, Ozone) have no carbon content. Other gases that have carbon content (Carbon Monoxide) but are not considered to be greenhouse gases.

It makes no sense to have policies to encourage something that is already cost competitive and objectively a good thing.

Therefore, one of the following must be true:1. Renewables aren't actually cost competitive2. People don't agree they're a good thing, so they're not building them even though they're cost competitive3. Special interests are again obscuring reality.

Personally, I think that it's a combination of all 3. Fully costed renewables (including grid costs, environmental costs, reliability costs/storage costs/redundancy costs) are not actually cost competitive, despite what some people say. Renewables are not as good a thing as the marketing would say - many people don't like windmills near them, some PV installations are built on prime farmland, there are substantial environmental costs in the manufacture of solar panels. And there are definitely lots of special interests that are muddying the waters so it's very hard to know what the truth is.

Frank, I think CO is not considered as a greenhouse gas solely because it cannot exist in the atmosphere in sufficient quantity to affect radiation balance. As was noted above it pretty soon gets oxidised to CO2.So emitting a mole of CO should be considered exactly equivalent to emitting a mole CO2.In my book the purpose of a carbon (emissions) tax is to nudge along our transition to post-fossil-fuel infrastructure.--E5

"Frank, I think CO is not considered as a greenhouse gas solely because it cannot exist in the atmosphere in sufficient quantity to affect radiation balance. As was noted above it pretty soon gets oxidised to CO2."

Yes, but we are talking about culpability here. Can I, as carbon monoxide emitter, be held culpable (in terms of greenhouse gas effect) for what happens to the carbon monoxide after I emit it? It is already established that carbon monoxide, in and of itself, does not affect radiation balance.

It's a slippery slope when we start taxing things based upon their knock on affects.

"In my book the purpose of a carbon (emissions) tax is to nudge along our transition to post-fossil-fuel infrastructure. --E5"

First, it is unlikely that we will ever become totally independent of fossil fuels as an energy resource. Solar, geothermal, wind, and other clean sources of energy all have problems with demand flexibility. Battery technology would have to jump light years ahead to make them viable energy sources on a large scale.

Second, if emissions are to be considered a big problem, they can be dealt with through improved sequestration techniques - we already do this for Sulphur Dioxide emissions on coal fired power plants. And I believe the Germans are working on improved CO and CO2 sequestration techniques.

I am not saying that we should abandon clean energy alternatives. From a consumer choice position, the more choices that are available, the better.

CO2 is only pollution if it causes climate change. Otherwise it's a natural component of air that helps plants grow. So arguing it makes sense to tax CO2 as a pollutant irrespective of climate change isn't true if the only reason we consider it a pollutant is climate change.

Good point. And so if we are combating the change in atmospheric CO2 content through taxation, then deforestation and urban sprawl are just as culpable.

Also, all of this presumes that we know what the correct (non-polluting) percentage of CO2 relative to the rest of the atmospheric gasses should be. Take all of the CO2 out of the atmosphere and plant life goes extinct.

British Columbia might be the best example of a well implemented carbon tax. 30$/ton. Re-injected as tax-cuts and rebates. It reduced GHG emissions by about 5-15%, with no discernible economic impact.(Murray, Brian, and Nicholas Rivers. "British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy." Energy Policy 86 (2015): 674-683.)

If I read correctly FrankR is saying that Greenspan et al got rid of Glass-Steagall and the consequence of the resulting disaster is Dodd-Frank. So conservatives did something whose chain of effects includes Dodd-Frank. So they have no business complaining about it.If my reading is correct I couldn't agree more.On another note ... is JZ properly distinguishing between neo-liberal (one favouring global free trade) and liberal (one disdained by a self-identifying "conservative")?--E5

Here is a simple question that every "climate change expert" should be able to answer:

What is the correct concentration of carbon dioxide (relative to other gases) in the atmosphere?

https://en.wikipedia.org/wiki/Atmospheric_chemistry

Right now, Carbon Dioxide makes up about 400 parts per million (0.04%) of the atmosphere. What is the correct number? 0% - all plant life on Earth would die off.

If there is an answer to that question (and I don't think there is), then a more proactive approach to atmospheric carbon reduction is required - including the subsidization of carbon sequestration techniques.

It's fine if the U. S. government wants to tax me $40 for every ton of CO2 that I put in the atmosphere, but I expect to be paid $40 for every ton of CO2 that I remove from the atmosphere.

I, personally, believe more good is done with positive incentives than with negative incentives.

If we simply wait until everyone is dead the problem will solve itself in an economically efficient manner. We can barely afford to relocate people in tiny villages in Alaska to higher ground as the permafrost that kept their villages secure melts out from beneath. How will we move the already episodically flooding communities on the Eastern Seaboard? NYC, Miami, Hampton Roads, Norfolk? Strongly worded admonitions from economists for the ocean to stay back?

And why so many completely random and unpredictable comparison cases when there are much more comparable examples? Is it part of an attempt to minimize and diminish potential effects, as it seems, or an unwillingness to address the fact that science is conservatively biased and favors gradualist rather than sudden conceptions of change? The knock on effects of a simple tiny two degrees, already baked in, would be catastrophic and may already be built in as we zoom ahead to four or more degrees, and sooner than even "hair on fire" climate scientists would be prone to support lest they be publicly abused.

The whole plan feels like a sop to the alarmists. Let's get something done that's "efficient". What's still missing is any conclusive evidence that CO2 at 400ppm is a problem, much less a global catastrophe. The science is still simply not there. What is scary is the prospect of giving the government $300 B/yr and assuming they'll give it back.

"Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?"Sitting here in Palo Alto, just a few feet above high tide, sea level rise (a consequence of temperature rise) does seem well up the list.Nuclear war .... not likely since it is now pretty evident that nuclear bombs are viable weapons only for use by terrorists.Pandemic ..... well, not so likely. Much has been learned, about impeding disease spread, since the Spanish Flu.State failure ..... well, the US is constantly teetering on the brink of fascism but our institutions of law seem to be pretty resilient.No, I think the sea coming up and swallowing most of Silicon Valley is pretty much it.--E5

The bay is 12 feet deep. Turning the San Mateo bridge into a dike would cost little, and spare Palo Alto completely. Not everyone is so lucky, but all real estate depreciates in 50 years or so. Even moving is not a civlization-ending expense. That's the trouble -- economic analyses of the cost of climate change come up with a lot of money, but not "greatest danger" sorts of money, especially for a threat that comes slowly and predictably over 100 years.

Well, it really depends on what you consider to be danger. Life is dangerous. It invariably ends in death.Boredom could be considered a greater danger.The trouble with the consequences of fossil fuel burning is that they are all insidious. Even though they move very slowly you cannot run away from them.That's why I try to look at the transformation to a long term sustainable future rather than looking at the consequences of continuing with a status quo that cannot last very long.--E5

This doesn't seem very different from the June 2015 proposal by Senators Schatz and Whitehouse known as the "American Opportunity Carbon Fee Act". That was a similar rate, $45 per ton, and revenue neutral. But it got nowhere because Republicans were unwilling to entertain any carbon related proposal under President Obama.

And they made the politically correct decision - they maintained control of the House and Senate. And so despite the economics and science of it, politics trumps both.

And it really makes me laugh that Baker and Shulz throw this line in their proposal:

"This plan will also be good for the long-term prospects of the Republican Party. About two-thirds of Americans worry a great deal or fair amount about climate change, according to a 2016 Gallup survey."

Which is funny. Here are the exit polls for the last election:

http://www.cnn.com/election/results/exit-polls

Top 4 among both Democrats and Republicans:Foreign PolicyImmigrationEconomyTerrorism

Where were Baker and Shulz telling Republicans to get behind a carbon tax prior to election?

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About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!